It approximates the status quo for the largest U.S. banks when it comes to shareholder payouts.
The Federal Reserve is now set to end special restrictions put in place during the pandemic on the ability of most major banks to repurchase stock and pay dividends starting June 30, according to test results. annual resistance. Banks will have to clear the minimum capital levels set by this review. Normally, under the Fed’s stress-testing regime, banks that fail to meet their requirements are given the opportunity to adjust their balance sheets and face restrictions that scale as they fall below their minimums. . For now though, a bank that fails to meet the stress test minimum remains subject to the current restrictions, which limit redemptions on a rolling net profit basis, for an additional quarter before the usual regime kicks in. .
The move comes after the Fed did something that, in theory, could hamper bank payments, namely letting the exemption for Treasuries and central bank reserves expire based on the indebtedness of large corporations. banks. This means that the big banks are now approaching their debt limits. Importantly, the Fed’s stress capital buffer regime does not include a stressed leverage component. This potential limitation may therefore not be taken into account in the payment restrictions at this time.
Assuming this year’s stress test isn’t considerably tougher than those of past years, a significant chunk of the money is still to be released. Goldman Sachs Group analysts estimate that the biggest banks have the ability under current rules, before the June 30 easing, to repurchase up to about $22 billion in shares in the second quarter. Once the rules are relaxed, they estimate that takeovers could nearly triple in the second half, to $63 billion, or about 3% of those banks’ market value. Consumer lenders that have rebounded strongly so far may have one of the biggest upsides: Goldman analysts expect the biggest takeover in the second half of 2021 as a percentage of market value among major banks in Capital OneFinancial.
The extent to which banks exploit this capacity is the next question. In theory, under the stress capital cushion scheme which started last year but has not really been used due to the pandemic, redemptions could occur at a faster rate than under the pass. However, if lending rebounds strongly, risk-weighted assets will rise much faster than they have, with banks buying mainly government bonds, which could put pressure on capital ratios. . Rapidly rising price-to-book ratios of bank stocks could also discourage redemptions.
But the bottom line is that investors can mostly start thinking about bank payments as they did before the pandemic. That alone should be good for bank stocks.
Write to Telis Demos at [email protected]
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Appeared in the March 27, 2021 print edition as “Payday Is Nearly Here For Bank Investors”.